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Can tax law really be made simpler?

Some takeaways from the recent Tax Simplification Symposium.

The Tax Simplification Symposium held 10 and 11 October 2018 and culminating in a summary seminar for SAICA members on 12 October revealed some interesting common themes in the context of tax simplification, not least of which is that there is no clear view on what ‘tax simplification’ really means.

Nevertheless, what did become clear is, first, that if ‘simplification’ is defined by, or leads to, certainty, trust increases between taxpayers and their tax authority, which ultimately improves compliance and therefore collections.

Second, simplification is not always necessary, especially in the context of complex businesses or complex business arrangements affecting only a few taxpayers.

Finally, in the South African context, the Tax Administration Act (28 of 2011) is considered to be easily understood and implemented. However, the Income Tax Act, which was first promulgated in 1962, now comprises a ‘mish-mash’ of the amendments that have taken place over the last 56 years, and the readability of the Act could quite easily be improved purely by rearranging the sections to follow a logical order. This could be effected almost immediately without having to re-write any of the sections themselves, which could open up risks of loopholes.

The symposium itself revolved around the presentation of a number of research papers which had been prepared by and through a collaboration of tax academics and tax practitioners from around the world.

The presentations uniformly determined that tax complexity and thus its converse, simplicity, can be looked at by reference to both legislative factors and administrative factors (the latter is termed ‘effective’ simplicity).
On the legislative side, one might look at the number of exemptions, incentives or anti-avoidance provisions, the number of pages, the readability (often determined by reference to a readability index), the effectiveness of guidance on the legislation, the number of taxpayers affected by a specific provision or set of provisions and the frequency of changes. All of these combined lead to lack of certainty for taxpayers which depicts complexity.

On the administrative side, one might look at the information required to comply and the aggregated compliance burden both for the taxpayer and the tax authority. As John Whiting, former head of the Office of Tax Simplification in the UK (yes, such an office really does exist in the UK and similar initiatives have taken place in New Zealand and Australia) said, ‘Taxpayers should understand what is required and how to comply.’
It was universally agreed that technology can help immensely with simplifying the compliance (administrative) burden for taxpayers and tax administrations. However, this is reliant on accessibility to the technology. Surprisingly, we were told by Nina Olson, National Taxpayer Advocate for the USA, that of 150 million taxpayers in the US, 41 million don’t have access to broadband in their homes and around 14 million don’t have any access at all.

From a South African perspective, reference was specifically made by the speakers to the medical aid rebates (one needs a postgraduate degree to understand the legal sections although most taxpayers claim the rebate) and pension provisions for individuals. For corporates, transfer pricing (the most complex for relevant corporates when read together with the OECD guidelines supporting section 31, as well as the local Government Gazettes), controlled foreign companies (complex in readability and length, as well as administratively burdensome − the comment was made that this is perhaps overly so for a developing country like our own), corporate rules (group tax was debated but not concluded on) and small business tax legislation were referred to in order to demonstrate both legislative and administrative complexity.

A look at Ethiopia’s small business tax rules, however, caused the South African contingent to breathe a sigh of relief at our relatively simple provisions when compared to the Ethiopian regime.

Dr Brian Keegan (Head of Tax at the Irish Institute of Chartered Accountants) perhaps provided the ultimate answer to simplicity when he explained the Irish experience. Removing all incentives and rebates and reducing the tax rate to 12,5%, which has prevailed for many years (there is certainty as to the rate continuing) has made the tax regime in Ireland easy to understand and to comply with. There is little need for complex anti-avoidance provisions, as there is little tax to avoid. Ultimately this appears to have resulted in more tax collected. He did, however, indicate that the administrative side of things is not as easy as the legislative side.

Interestingly, it was pointed out that the Davis Tax Committee’s corporate report suggested removing incentives from the South African legislation and replacing them with an overall reduced tax rate. The report made it clear, however, that without other business-friendly policies, such a move (even in a stronger economic environment than South Africa is currently in) would not necessarily succeed in its objective. Dr Keegan conceded this point.

It was only in the very last presentation that Professor Jinyan Li from Osgoode Hall Law School in Canada advised that she had read the South African Income Tax Act and found that there to be little logic in much of its flow. She pointed out that even the charging provision itself, in section 5, is very awkward: it levies income tax on ‘taxable income received or accrued’ − can one really receive or accrue ‘taxable income’, which is a term defined by a number of other terms – ‘income’ and ‘gross income’ − and takes into account deductions? The product of these defined terms is then combined to provide a set of rules for determining the ’taxable income’ based on the provisions in the Act. The Minister must then, separately, determine the rates to be applied to the taxable income, which are changed (one of the indicators of complexity) annually.

To further demonstrate her point, Professor Li gave the example of withholding taxes which sit in sections 47A to 50D (for entertainers, interest and royalties) but with turnover tax for micro businesses in between (sections 48 to 49) … perhaps viewed as a withholding tax on oneself? … and then only again in section 64D for dividends, thus making it very difficult to find all the different withholding taxes. (She did not even mention section 35A for immovable property − perhaps because it is not a final tax?)
Her suggestion was that, as a starting point, the South African Income Tax Act could be rearranged to give the sections a more logical flow. Perhaps if nothing else is taken from the symposium by Treasury and SARS (who both had representatives present), this could be the one suggestion easily actioned.

Professor Deborah Tickle CA(SA), University of Cape Town.

This article was originally published in ASA.